Online delivery is not profitable. Why are discount chains using it now?

Common Dollar (DG), Dollar tree (DLTR), Family Dollar (owned by Dollar Tree), Year below (NO. 5) and Grocery (GO) all have started offering delivery from stores in the past year.

They are tapping delivery companies, such as Instacart and DoorDash, to rely on the platform’s network of independent contract drivers to pick and deliver same-day orders from their stores. Platforms receive a share of the sales reduction.

In recent months, chains have said offering delivery will help them cut spending from existing shoppers, who have increased their online purchases during the pandemic. The stores will be listed on the delivery platforms’ websites, and they bet they can attract customers who have never shopped with them before.

“We thought going online here initially through this experiment with Instacart was a great way for us to introduce the brand” to new shoppers, said Grocery Outlet CEO Eric Lindberg. Eric Lindberg, CEO of Grocery Outlet said during an earnings call last month. Grocery store, sometimes called TJMaxx of supermarkets, announced in October that it is testing delivery at its California stores for the first time in its 75-year history.

Initial resistance

These companies want customers to shop inside their stores — and until recently declined to offer delivery services because of concerns about profits and how it would affect in-store sales. and lack of demand from their customer base.

Online delivery is notoriously unprofitable, which contradicts the low-cost operating model of discount stores. Their ability to sell cheaply comes from keeping costs low, so building their own delivery network, for example, would be taboo.

The average shopper spends only about $10 when they shop at dollar stores and about $15 at Five Below, making it even harder to profit from online sales than competitors. Players are earning significant revenue every time a customer places an order online.

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Some of these stores are designed to be a “treasure hunt,” where customers shop impulsively when they go inside and pick up a few eye-catching items. Unplanned purchases happen online less often.

Lindberg said in a March interview with CNN Business. “I don’t think it’s profitable” for supermarkets, and “it’s very difficult to recreate treasure hunts, recreate values ​​online.”

Similarly, Dollar General’s CEO, Todd Vasos, said at the September 2020 conference that “our core consumers, while beginning their digital journey, are still behind the road. compared to the rest of America.” Dollar General’s core customers earn about $40,000 a year per household.

Dollar General already offers online shopping, in-store pickup, and scanning and shipping, allowing shoppers to scan and pay for items from their phones without waiting in the checkout line. But online delivery “doesn’t matter much” to Dollar General’s main shoppers, Vasos said last year.

A change of heart

Many discount chains are still delivering, including Trader Joe’s, Burlington (BURL), Ross Store (ROST) and Ollie’s Bargain Outlet (OLLI). But Grocery Outlet, Dollar General and others have changed their stance.

They are responding to competition, increased demand from customers for online options, and the growth of platforms like Instacart that can run their delivery operations.

Their discounting competitors such as Walmart (WMT), Target (TGT), Costco (PRICE), Big number (BIG) and Aldi have successfully delivered to shoppers, while drug stores and convenience stores have also expanded online. They risk losing their eager online customers to competitors if they keep holding back on deliveries.

The Covid-19 pandemic has also spurred millions to shop online for the first time, including many shoppers in these chains’ lower-income establishments.

According to the Commerce Department, e-commerce sales have grown from 11% of total retail sales around the time of the start of the pandemic to more than 15%. data. Online sales are expected to continue to grow at a faster rate than physical sales in the coming years.

“They’ve heard enough from their customers and investors that there’s going to be demand for it,” said Joseph Feldman, a retail analyst at Telsey Advisory Group.

Despite the growth of online shopping, discount chains moving to online delivery through partnerships comes with some risks.

Instacart, DoorDash and other delivery platforms are starting to build their own warehouses and stock them with food, household essentials and other goods. Likely – knowing exactly what Dollar Tree or Five Below bought out of their sites – the platforms try to steer the chain’s customers away from them and towards their own new services.

And some stores worry that customers will replace store visits with online purchases, Feldman said. This will cut down on the chain’s more profitable direct selling and lead to them making fewer impulse purchases that are important to the chain.


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